Stocks fell sharply yesterday led by banks which sold off in sympathy for SVB Financials’ woes. Employment showed small signs of weakening.
What happened to Uncle Billy? I don’t want to say, “we should have seen this coming,” but, really, we should have. In the past several days, I have underscored several banks under pressure. Granted, the initial pressure started when one super-regional bank was a bit overexposed to digital assets, or, as they are more affectionately known, crypto. When we see a particular asset class under pressure, it makes sense that banks or investment companies heavily invested in those… well, struggle. We saw it back in 2008 with The Great Financial Crisis during which banks were overexposed to bad loans which ultimately led to many of them shuttering. To be clear, this is nothing like that, but I used the GFC as a clear example.
Yesterday morning, I highlighted SVB Financial (SIVB) which was already deeply in the red before the market opened. In case you missed my note (), SVB announced that it was selling anything in its portfolio available for sale and raising funds in a stock offering. The company would take a $1.8 billion loss, but it was necessary to shore up its balance sheet. Pro tip: any time you see the words “shore” and “balance sheet” in the same sentence when related to a bank, you should take notice. SVB Financial is the parent company of Silicon Valley Bank which specializes in financing venture capital startups… like the ones from… er, Silicon Valley. You might have noticed that venture capital was in a bit of a rout last year with very little opportunities to exit in the public markets, significant pressure on growth stocks (most of which started out as VC-funded startups), and vast valuation write-downs. As you might guess, in that type of environment, VCs, really smart folks, tend to tighten up the purse strings, investing less and with a much higher bar. That all resulted in what was a tough year for SVB, and it all came to a head yesterday when the stock fell by -60.41%! Investors, fearing the worst for the banking community as a whole, sold, sold, sold, pushing the whole sector down by -6.57%. Now, SVB is unique due to its exposure to struggling Venture Capital, and Signature Bank NY (SBNY) is unique in its over exposure to crypto assets, but what about the rest of the banks, do they deserve the ire of the market?
Well, there is a good chance that all banks have some exposure in one way or another to cryptos and VC investments, but not likely enough to warrant the trouble we witnessed with SVB and Signature Bank. However, this is not exactly a good time for banks in general, contrary to what many think. Sure, interest rates on loans are higher, but remember that the way banks make money is through the yield curve. They traditionally borrow in short maturities (savings accounts, CDs, etc.) and lend in longer maturities like mortgages, construction loans, and the like. The spread between the two is the bank’s Net Interest Margin, the first thing an analyst looks at when determining a bank’s strength. Oh, and by the way, bigger is better when it comes to NIM. Have you seen the yield curve lately? Sure, you have! You read all about it just yesterday in my daily note. It is inverted, which means banks must pay more to borrow in short maturities than what they can charge in longer-maturity loans. Not only is that spread not big, but it is negative. Don’t worry, banks are not intentionally losing money on lending, but they are struggling to make the kind of margins they would like. Adding to the banks’ strain is a challenging underwriting environment. Economic stress, intentionally brought on by the Fed, means companies are more likely to default causing the banks to be extra cautious when lending. Further, loan demand is down as borrowers pull back and hope for lower rates in the future. Finally, the Fed is intentionally taking liquidity out of the economy. Raising interest rates and quantitative tightening (shrinking the Fed balance sheet) are all part of the Fed’s strategy to tackle inflation. That is why it is call monetary tightening, and the banking system is at the center of that universe. Now, it is really important to note, that the banking system is in no way showing signs of trouble, but it is important to recognize that banks are certainly under pressure to maintain margins. What do the Fed policy makers think of all this? Well, naturally, they are pleased; the market is, once again, doing some of the heavy lifting for them.
WHAT’S SHAKIN’
SVB Financial (SIVB) shares are lower by another -44.39% in the premarket in continuing fallout from yesterday’s debacle. Adding to the stock’s stress is the parade of high-profile investors recommending that folks withdraw funds and investment in SVB Financial. Potential average analyst target upside: +139.9%.
Oracle Corp (ORCL) shares are lower by -4.86% in the premarket after it announced that it missed Revenue estimates despite a moderate EPS target beat. The miss is attributed to the company’s cloud revenue, which grew at a slower pace than expected. Dividend yield: 1.84%. Potential average analyst target upside: +9.5%.
YESTERDAY’S MARKETS
Stocks sold off yesterday despite a weaker-than-expected weekly jobs number, as markets followed SVB Financial into the red. The S&P500 Index sold off by -1.85%, the Dow Jones Industrial Average traded lower by -1.66%, the Nasdaq Composite Index dropped by -2.05%, and the Russell 2000 Index declined by -2.81%. Bonds gained and 10-year Treasury Note yields fell by -8 basis points to 3.90%. Cryptos dropped by -7.92% and Bitcoin lost -8.09%.
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